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Second Circuit applies rebuttable presumption that fiduciaries were prudent in offering employer stock for one retirement plan but denies the presumption to another plan

In Taveras v. UBS AG, No. 12-1662-cv (2d Cir. Feb. 27, 2013), the Second Circuit held that ERISA plan fiduciaries are not entitled to a presumption that they acted prudently by offering plan participants the opportunity to invest in employer stock where the plan’s terms merely permit – but do not in the Court’s view require or “strongly encourage” – employer stock as a plan investment option. Many federal courts, including the Second Circuit, recognize that under the Moench presumption (named for Moench v. Robertson, 62 F.3d 553 (3d Cir. 1995)), a fiduciary’s decision to offer the employer’s own stock as an option to retirement plan participants is presumptively prudent under ERISA. In a 2011 decision, the Second Circuit adopted the Moench presumption in a case involving a plan that required fiduciaries to offer employer stock as an investment option. In Taveras, the Second Circuit again applied the Moench presumption to a plan with such mandatory language, but this time declined to apply the presumption to a second plan that merely permitted the plan’s investment committee to offer employer stock. The Court reversed the district court’s dismissal of an ERISA class action as to that plan.

In this advisory, attorneys from our ERISA Litigation Practice summarize the case and identify important ramifications of the Court’s decision, which is of particular interest to employers offering company stock to retirement plan participants.

Background

Taveras concerned two retirement savings plans that UBS AG and UBS Financial Services offered to UBS employees. Each plan allowed participants to invest in the UBS Stock Fund, which tracked the performance of UBS’s common stock. The crucial difference was the way the plans offered the fund. One of the plans – the “Plus Plan” – gave the plan’s investment committee discretion to add or delete authorized investment options, but expressly instructed that the committee “shall” provide the UBS Stock Fund as an investment option. The other plan – the Savings and Investment Plan (SIP) – gave the plan’s investment committee complete discretion to add or delete authorized investment options. The SIP had no language mandating that fiduciaries “shall” provide the UBS Stock Fund.

Plaintiffs alleged that UBS stock, including the UBS Stock Fund, suffered significant losses because UBS invested $100 billion in subprime mortgage-backed securities and also due to $43 billion of asset write-downs. The complaint claimed that those losses caused UBS to become insolvent and need a bailout from the Swiss government. Several UBS employees who allegedly invested in the Stock Fund brought a putative ERISA class action. They claimed, among other things, that various plan fiduciaries breached their fiduciary duties because it was imprudent to continue to offer plan participants the option to invest in the UBS Stock Fund.

The district court dismissed the complaint as to both plans. It held that because each plan “sufficiently mandated or encouraged” the option to invest in UBS stock, the fiduciaries’ decision to follow that encouragement and continue to offer the UBS Stock Fund was presumptively prudent. The district court concluded that plaintiffs’ allegations failed to plead sufficiently “dire circumstances” facing the company to overcome the Moench presumption.

Opinion

On appeal, the Second Circuit affirmed in part and vacated in part. The Second Circuit’s decision began by emphasizing ERISA’s duty of prudence, which demands fiduciaries make investment and managerial decisions with the skill, prudence, and diligence of a “prudent man acting in a like capacity and familiar with such matters.” It explained that this duty of prudence sometimes may be in “tension” with a competing value of encouraging employer stock investment, as the Court observed, where a fiduciary is explicitly obligated by the plan’s terms to offer employer stock to participants. The Moench presumption, the Court reasoned, was created to address that tension.

Guided by this reading of the purpose of the Moench presumption, the Second Circuit concluded based on the plans’ specific language that the presumption ought to apply to the Plus Plan but not to the SIP.

Regarding the Plus Plan, the Court observed that among the plan’s stated aims was to provide an opportunity “to acquire [UBS] Common Stock.” It was critical to the Court that while the Plus Plan allowed the investment committee to add or delete particular investment options, it expressly stated that one option “shall be” the UBS Stock Fund. This mandatory language “mirror[ed]” similar language from other plans that the Court had previously determined indicated an explicit obligation to offer employer stock. As a result, the Moench presumption applied.

The Court came to a different conclusion on the SIP, though. It found nothing in the plan mandated that the UBS Stock Fund “shall” be offered as an investment option. The Court noted that the UBS Stock Fund was the only investment option the SIP specifically described. While the district court relied on that fact to determine the plan encouraged investment in UBS stock, the Second Circuit ruled that merely referencing or describing the UBS Stock Fund did not “require or encourage its fiduciaries to offer the UBS Stock Fund as an investment option.” Because it determined that the SIP did not “require or even strongly encourage” investment in the UBS Stock Fund and “simply presents it as one permissible investment option,” the Court would not apply the “especial presumption” that plan fiduciaries behaved prudently by offering employer stock as an investment option.

While affirming the application of the Moench presumption to the Plus Plan, the Court vacated the district court’s decision as to the SIP, and remanded the case.

Ramifications

Although Taveras appears to draw a bright line outer limit on the sorts of plan provisions that give rise to the Moench presumption, it in fact only muddies already unclear waters. The Second Circuit’s previous decisions made clear that mandatory plan language requiring plan fiduciaries to offer employer stock to plan participants will give rise to a presumption of prudence, and that some plan provisions that stopped short of an actual mandate could do the same. Taveras, unfortunately, confirms that some plan language that expressly refers to employer stock investments will fall short of what is required to invoke the presumption. The Court offers very little guidance to plan sponsors regarding how to draft non-mandatory plan language that is sufficient to do so, however.

This task is further complicated by significant differences among federal circuit courts regarding the application of Moench. While many circuit courts, including the Second, Third, Fifth, Sixth, Ninth and Eleventh Circuits, have expressly adopted the Moench presumption, not all courts have yet done so. Even among those that have, significant differences remain as to its application and its scope. The differing approaches the circuits have taken makes this area of law ripe for Supreme Court resolution, but already this term, the Supreme Court has denied certiorari on multiple cases that concern the application of the Moench presumption. Until the Supreme Court steps in, plan fiduciaries making decisions regarding investment in employer stock should continue to monitor this area of the law for developments concerning the scope of their fiduciary obligations, and should be aware when making decisions on employer stock funds that the state of the law in this area remains unsettled.

Compare jurisdictions: Litigation: Enforcement of Foreign Judgments

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